Who Are the Fiduciaries and What Are Their Key Responsibilities?

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1 Who Are the Fiduciaries and Presented by: Thomas H. Mug Greensfelder, Hemker & Gale, P.C. 10 South Broadway, Suite 2000 St. Louis, Missouri (314) Section 3(21) of ERISA defines a fiduciary as a person, with respect to an employee benefit plan who exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets; who renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so; or who has any discretionary authority or discretionary responsibility in the administration of such plan. 2 1

2 Section 404(a)(1) of ERISA provides that a fiduciary will discharge his duties solely in the interest of the participants and beneficiaries for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable administrative expenses; with the care, skill, prudence, and diligence that a prudent man acting in a like capacity would use; by diversifying the investments of the; and in accordance with the documents and instruments governing the plan. 3 Trustee (discretionary or directed) Plan administrator Plan investment committee members Plan administrative committee members Investment managers Plan sponsor Members of a Board of Directors Any person who can appoint or remove other fiduciaries Service providers (TPAs, attorneys, valuation advisors) are generally not fiduciaries. 4 2

3 Fiduciary status is determined by role or function rather than title. A fiduciary may be named in a document or simply become one by performing a fiduciary function. A person may be a fiduciary for a plan for one purpose, but may perform nonfiduciary duties as well. Named fiduciaries are those designated in plan documents trustees, plan administrators, committees, etc. 5 Types of Trustees Discretionary trustees Directed trustees Limited purpose trustees (e.g., transactional trustees) Who Serves as Trustees? Institutions banks or trust companies Professional trustees Internal trustees individuals within the company 6 3

4 Representing participants in the purchase of company stock Trustee must assure that the purchase decision is prudent by Conducting due diligence Engaging qualified professional advisors Determining that the terms of the transaction are fair to the plan Trustee must actively negotiate the transaction. 7 Representing participants in the purchase of company stock Trustee is required to assure that the plan will not pay more than adequate consideration for the stock by - Engaging a qualified valuation advisor Participating in the valuation process Reviewing and understanding the valuation and underlying assumptions Trustee is also obligated to determine that the structure of the transaction is appropriate. 8 4

5 Investment of Plan Assets Investment in company stock Trustee must be prudent in retaining company stock. ESOP Trustee is exempt from duty to diversify with respect to plan assets. Investment of non-stock assets All of the ERISA duties (prudence, diversification and exclusive benefit) apply here. Investment policy statement should provide guidance. Trustee can delegate investment responsibility to an investment manager under section 3(38) of ERISA. 9 Responding to Offer to Purchase Company Primary obligation in any transaction is to act for the exclusive benefit of the ESOP participants and beneficiaries. Trustee must consider offer in concert with Board of Directors To be accepted the opportunity must be better for the participants than retention of the stock. Sale of company requires a substantial premium over current stock value Trustee must consider the future prospects for the company 10 5

6 Responding to Offer to Purchase Company If a decision is made to consider a sale Trustee must negotiate aggressively. Pass-through voting may be a consideration based on transaction structure. 11 The ESOP as a Shareholder Board Oversight Assurance of proper corporate governance Regular Board meetings Addition of independent directors Review of executive compensation decisions Reasonableness of compensation level Effect on plan, particularly deferred compensation Voting stock Electing directors Other shareholder voting issues 12 6

7 Corporate acquisitions Normally a Board decision, but requires Trustee oversight to protect participants Loan refinancing Fiduciary obligations in refinancing are set forth in DOL Field Assistance Bulletin Decisions to redeem or repurchase shares 13 Primary duties Recordkeeping determining eligibility, allocation of contributions, tracking account balances, compliance testing and producing statements. Interpretation of plan documents determining benefits, share release calculations, administering claims, processing distributions. Fiduciary duties vs. ministerial duties 14 7

8 Plan sponsor decisions are normally made through the Board of Directors. Board is acting as an ESOP fiduciary in certain cases. In the adoption of the ESOP and determination of the plan terms In the appointment of other fiduciaries, i.e. trustees, plan administrators Fiduciary obligations under state law are governed by the business judgment rule. 15 Conflicts of interest arise when individuals serve in multiple roles fiduciary and nonfiduciary. Corporate officer or shareholder as internal trustee Board member as internal trustee Board or plan sponsor or internal administrative committee directing trustee 16 8

9 Best practices for avoidance of fiduciary conflicts Use of independent trustee Presence of independent directors on Board Financial advisor / valuation firm s sole engagement is with the trustee Avoidance of multiple roles for an individual 17 Fiduciary process GreatBanc Trust Settlement Agreement Document sets forth DOL expectations for ERISA fiduciaries Key issues in Settlement Agreement relate to valuation Valuation advisor selection Review of valuation report Trustee s need to evaluate transaction effect of debt on company, etc. Trustee should consider use of claw back in transaction Documentation of trustee s role in the transaction 18 9

10 Whether and employee of a named fiduciary (an institutional trustee) is a fiduciary Hugler v. Vinoskey In a preliminary motion the court held that if an employee of the fiduciary exercises individual discretion, that employee can be considered a fiduciary. 19 Stock Drop cases leading case is Fifth Third Bancorp v. Dudenhoeffer There is no presumption of prudence for ESOP fiduciaries; however, a lack of prudence must be proven by plaintiffs. Trustees cannot be required to violate securities laws, i.e., improper use of inside information. Trustees cannot take action that would cause more harm than good, i.e., causing a further drop in the value of the stock

11 DOL ESOP litigation Reduction in the number of institutional ESOP trustees Banks and trust companies reducing services or exiting business entirely Institutional trustees declining engagements 21 Individual professional trustees filling the gap Cost of ESOP transactions increasing significantly Increase in professional advisors (attorneys, financial advisors, valuation firms) required Required due diligence and negotiation 22 11

12 Thomas H. Mug Greensfelder, Hemker & Gale, P.C. 10 South Broadway, Suite 2000 St. Louis, Missouri (314)